Can Insider Trading information be a Useful Tool for Investment Managers?

Can legal insider trading disclosure data reported to the SEC provide an effective tool for identifying investments at the company level?

For decades, institutional investment managers and individual investors have searched for different ways to make outsized returns in the stock market. Predominant finance theories formulated by academics suggest this task is not possible because the market is efficient. However, as a scholar-practitioner with 24 years in the investment management industry, I have discovered that Insider Trading disclosure data provides a unique information signal that can be a useful tool for identifying profitable investments at the company level.

With such high profile legal cases like Martha Stewart’s, negative attitudes toward insider trading abound in the public eye. However, certain types of insider trading are sanctioned by the Securities Exchange Commission. This review examines the scholarship surrounding legal Insider Trading. Academicians began researching Insider Trading in the 1970s, noting the intimate knowledge that those within a company have that those on Wall Street lack. This unique understanding of company information can lead to abnormal returns on investments. Upon reviewing the various views of Insider Trading noted in the literature, this review notes practical application of the practice for investment managers, particularly in conducting security analysis in light of new disclosure regulations implemented in 2002. Finally, the broader benefits of Insider Trading for the field of identifying investments are also noted.